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Market Bulletin - Bubbles and banks

27 April 2015

Central banks remain centre stage as technology stocks reach levels last seen during the dot-com boom.

Stocks around the world continued to hover around record highs during a week which provided mixed economic data and corporate earnings reports, and very little guidance as to what the future holds for the global economy. The NASDAQ Composite Index grabbed the headlines as it finally reached the levels last seen during the dotcom bubble of 1999–2000, boosted by robust earnings from Google, Microsoft and Amazon. The S&P 500 index also advanced despite several companies reporting concerns about the growing impact of the strong US dollar on their overseas business.

European equities gained 1.2%, while markets in Japan rose 1.9% on expectations of more asset purchases by the Bank of Japan. Further stimulus by the Chinese central authorities helped to push the Shanghai Stock Exchange Composite Index up 2.5% over the course of the week. In a bid to increase lending, the People’s Bank of China lowered the reserves that need to be held by banks: a response to continued signs that the economy is slowing and the concern that the annual growth target of 7% won’t be hit in 2015.

Greek gulf

The distance between Greece and its creditors widened further over the weekend as Yanis Varoufakis, the Greek finance minister, took to social media citing Franklin D. Roosevelt from 1936, “They are unanimous in their hate for me; and I welcome their hatred”, adding that it was a “quotation close to my heart (& reality) these days”. Speculation immediately ensued that Varoufakis had received a severe dressing-down during meetings in Riga on Friday with European finance ministers, not helped by his decision not to attend the official dinner in the evening.

The fundamental problem remains that Greece does not have the funds to repay its debts; €1.5 billion is due at the end of April, and around €20 billion is due in July and August. In a week where €1.3 billion was withdrawn from its banks by individuals and companies, the Greek government again raised the prospect of paying public sector pensions and salaries instead of debt repayments to the International Monetary Fund and European Central Bank. Having already thought to have approached Russia for funds, Greece has now been given until the next Eurogroup meeting on 11 May to deliver a comprehensive package of reforms to receive the €7 billion held over by the European Central Bank since last summer. As the liquidity crisis becomes more desperate by the week, the government has already issued an emergency decree forcing all local government bodies to transfer their cash reserves to the Bank of Greece. The move by Alexis Tsipras, the Greek prime minister, has caused consternation within the country; before it was elected, the Syriza party had pledged that this would never happen. However, without the money, public sector wages and pensions would not be paid in May.

Greek bank shares fell to an all-time low during the week, and have now dropped more than 50% since the start of the year. The emergency loan agreements from the ECB are predicated on the country’s banks remaining solvent; but as the Greek people remove their money, the ceiling on fund withdrawals is being hit on a weekly basis. ECB president Mario Draghi has insisted that Greek banks remain eligible for the funding, but other members of the governing council are pushing for there to be a cut-off point over the summer. Any decision to remove this facility would require a two-thirds majority, so it is thought that Draghi could be fighting a losing battle over the coming months.

The view of the Greek situation differs around the world. In the US, chief economic adviser Jason Furman said that a Greek exit would undermine the global economy and “would be taking a very large and unnecessary risk with the global economy just when a lot of things are starting to go right”. However, Wolfgang Schäuble, the German finance minister, has played down the risk of global contagion and insisted that markets have already priced in the costs of Greece becoming the first country to leave the monetary union.

The world’s local bank

In the UK, the FTSE 100 closed the week at 7,070, boosted by a surprise announcement from HSBC (the largest component of the index) that it may look to move its headquarters overseas, with Hong Kong thought to be the most likely destination. Avoidance of the UK bank levy would add 6% to corporate earnings in 2017. The bank’s $2.8 trillion of assets is nearly nine times Hong Kong’s GDP. Even if the Hong Kong regulator allowed the move, the likelihood is that some extremely strict regulations would be imposed, including raising capital buffers substantially, according to Morgan Stanley.

Many see the move as a timely threat from HSBC to whichever government is in charge after 7 May in the light of the much tougher regulatory regime that has affected HSBC and other banks in the UK since 2009. The key driver of HSBC’s review is believed to be new rules that force British retail banks to be legally separated from their commercial and investment arm.

Less than two weeks before the election, the bank faces pressure on many fronts. Politicians and regulators have severely criticised the way its Swiss arm helped clients evade tax, while shareholders have complained about falling profits and an underperforming share price. In addition, March saw the UK government raise the aforementioned industry-wide levy it imposes on British banks. Douglas Flint, HSBC’s chairman, announced ahead of the bank’s annual meeting that the review was underway, but did caveat it by saying that “it is too soon to say how long this will take or what the conclusion will be; but the work is underway”.

Investors seemingly welcomed the decision, as HSBC shares rose around 3% for the day. One potential disadvantage to moving the company to Hong Kong would be that the bank would need to reapply for all of its banking licences; a risk given that HSBC is still under investigation in the US for money laundering of $1.9 billion from Mexico. HSBC is not the only bank considering these changes: Standard Chartered is expected to carry out the same review after the election.

Slow to fall, quick to rise

It is widely expected that the cost of a tank of petrol will be heading higher over the next few weeks. The rally in the oil price has raised questions over whether the economic rewards of cheaper energy will actually pan out as expected. The price of Brent Crude oil is now around $65 a barrel, well above the lowest price of $45 a barrel seen in January, after further political worries in Yemen pushed up prices on the back of speculation of a fall in supply. According to the AA, for every dollar increase in the price of a barrel of oil, within two weeks a penny is put on a litre of petrol. The halving of the crude price in the second half of 2014 led to predictions of a windfall for large oil-consuming nations such as the UK, with consumers (in theory) having more discretionary money at their disposal. However, over time, the views of analysts are changing; Capital Economics now predicts only a 3% rise in real incomes, as opposed to the 3.5% growth predicted in January.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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